2025 was a very strong year for equities, with the S&P 500 rising 17.9% and non-U.S. equities gaining 31.2%.
Remarkable Year for Investment Markets
2025 was a very strong year for equities, with the S&P 500 rising 17.9% and non-U.S. equities gaining 31.2%. The artificial intelligence theme primarily drove domestic markets, while foreign markets benefited from increased defense spending, technological advancements, and a declining U.S. dollar, which fell 9.4% for the year. Equity return estimates for 2026 are positive but below long-term averages, as elevated valuations may dampen returns. Fixed income markets also posted solid results, with the U.S. bond market returning 7.3%, as measured by the U.S. Aggregate Bond Index.
Federal Reserves Continues to Lower Rates
As expected, the Federal Reserve cut rates by 0.25% in September, October, and December, though support for the move declined over time. Some Federal Reserve officials focused on a cooling labor market as the rationale for cutting rates, while others cited rising inflation as evidence for holding rates steady. Currently, the market is pricing in no rate cut in March, but an additional 2-3 cuts over the course of 2026. Of course, this may change when Chairman Powell’s term expires in May (President Trump has already expressed that anyone who disagrees with his desire for much lower rates has “no chance” of becoming the next Fed Chair).
Employment Numbers
Unemployment remains below 5%, a level historically considered “full employment.” Unemployment, however, is showing signs of a slight upward trend. Job openings, hires, and quit rates are trending downward, indicating a slightly cooling labor market. Nonetheless, initial claims have remained remarkably stable at approximately 200,000.
Economic Growth Remains Positive
The current median 4th GDP forecast is 1.3%, with a small number of projections skewed to the upside. While lower than the 3.8% growth rate posted in the 3rd quarter, the economy remains positive, and a recession does not appear imminent. Forecasted GDP growth for all of 2026 is approximately 2% – not robust, but solid. Estimates of economic growth outside the U.S. are muted but remain positive.
Looking Ahead for 2026
The primary economic and market signals are generally positive, though uncertainty persists over trade and tariff policies, inflation trends, Fed policy, and ongoing geopolitical risks. While we continue to seek active opportunities, our focus remains on a disciplined, long-term approach and on constructing diversified “all-weather” portfolios across asset classes and risk levels to help our clients achieve their financial goals.